A bond pays a coupon (or interest) rate of 5 percent each year for ﬁve years, with a future (face) value of $200. If the bond were sold today, what would be the present value of the bond?

Question

Quizplus · Accepted Answer

To find the present value of the bond, we need to discount the future value of $200 back to present. The formula to do this is:

Present value = Future value / (1 + r)^n

where r is the discount rate (or interest rate) and n is the number of periods. In this case, n = 5 (since the bond is held for 5 years) and r is not given explicitly.

However, we know that the bond pays a coupon rate of 5 percent each year, which means that the discount rate is also 5 percent. So we can plug in r = 0.05 and n = 5 to get:

Present value = $200 / (1 + 0.05)^5 
= $157.10 (rounded to the nearest penny)

Therefore, the best choice is B.

A Bond Pays a Coupon (Or Interest) Rate of 5